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Accounting Chap 11/12 Vocab

Terms in this set (21)

characteristics of liabilities
1. They occur because of a past transaction or event
2. They create a present obligation for future payment of cash or services.
3. They are an unavoidable obligation.
current liabilities
must be paid with cash or with goods and services within one year or within the entity's operating cycle if the cycle is longer than a year.

Examples:
- Accounts Payable
- Notes Payable (due within a year)
- Salaries Payable
- Interest Payable
- Sales Tax Payable
- Income Tax Payable
- Unearned Revenue
Sales Tax Payable
is recorded as a liability when it is charged to and collected from the customer; it is usually calculated as a percentage of the amount of the sale.

- It is not considered an expense to the business, but a current liability.
- Companies collect the sales tax and then forward it to the state at regular intervals.
Unearned revenue
arises when a business has received cash in advance of providing goods or services therefore has an obligation to provide goods or services to the customer in the future.
Short term notes payable
represent a written promise by the business to pay a debt, usually involving interest, within one year or less.
- When borrowing from a bank, a Promissory note is short term written promise to pay back. Amt of interest = Principal X Int Rate X time (Time is the portion of the year)
gross pay
the total amount of salary, wages, commissions, and bonuses earned by the employee during a pay period, before taxes or any other deductions.
- is an expense to the employer
net pay
is the amount the employee gets to keep.
Required Employee payroll taxes
paid by withholding deductions (meaning withheld from the employees' gross pay) are:
1. Federal State & Local Income Tax
2. FICA - OASDI (aka Social Security)
3. FICA - Medicare
Required Employer payroll taxes
The payroll taxes an employer is responsible for paying are:
1. Employer FICA Tax (Social Security & Medicare)
2. SUTA (State Unemployment Compensation Tax)
3. FUTA (Federal Unemployment Compensation Tax)
Long term liabilities
defined as those that do not need to be paid in one year.
- The current portion of notes payable is reported in the current liability section of the balance sheet.
Long Term Liability Payments
can be set up two different ways:
1. Equal Principle Payments (payment + the interest)
2. Equal Total Payments (Interest is already included)
Mortgages payable
is a long-term debt that is backed with a security interest in specific property.
- Payments are usually a set amount with the interest calculated first and the balance of the payment being applied to principal.
bonds payable
are long-term debts issued to multiple lenders called bondholders, usually in increments of $1,000 per bond.
- By issuing these, companies can borrow millions of dollars from thousands of investors rather than depend on a loan from one single bank or lender.
bond's stated interest rate
is the interest rate that determines the amount of cash interest the borrower pays and the investor receives each year
- is the rate of interest actually designated on the face of a bond certificate itself.
- The stated interest rate is also known as the face rate, coupon rate or nominal rate.
bond's market interest rate
is the rate that investors demand to earn for loaning their money. The market interest rate varies constantly.
bond face value
Occurs when a bond is issued at face value.
- Example: A $1,000 bond issued for $1,000.
bond discount
A discount on bonds payable occurs when the issue price is less than face value.
- Example: A $1,000 bond issued for $980. The discount is $20 ($1,000 ‒ $980).
bond premium
A premium on bonds payable occurs when the issue price is above face value.
- Example: A $1,000 bond issued for $1,015. The premium is $15 ($1,015 ‒ $1,000).
issue price of a bond
- The issue price of a bond does not affect the required payment at maturity.

- In all of the preceding cases, at the maturity date stated on the face of the bond, the company must pay the face value of the bonds.

- The issue price of a bond determines the amount of cash the company receives when it issues the bond.

- In all cases, the company must pay the bond's face value to retire it at the maturity date.
discount on bonds payable
occurs when a bond's issue price is less than the face value.
- this occurs because the stated rate of interest is less than the market rate of interest.
- Bonds are offered at discounted price to attract investors, since they can get a higher interest rate elsewhere.
premium on bonds payable
occurs when a bond's issue price is greater than the face value.
- This occurs because the stated rate of interest exceeds the market rate of interest and investors are willing to pay more, a premium.
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